There’s been substantial discussion of how the debt-to-GDP ratio evolves under the Obama plan. In part, the House attempts to pare back certain provisions of the Obama budget are a reaction to the projected rise in the debt-to-GDP ratio [0].
Inspection of Figure 1 does provide some support for the view that we need to pare back spending, or raise taxes (seldom mentioned).
Figure 1: Ratio of Federal debt held by public to GDP (blue), CBO baseline (green), Obama budget as scored by CBO (black), and CBO baseline minus stimulus package (red), by fiscal years. In the baseline minus stimulus, I have merely subtracted the cumulated stimulus bill deficits; hence, no accounting for associated interest is included. Dashed line indicates last observation on actual data. Sources: CBO, CBO historical statistics, and CBO letter to Grassley (March 2, 2009), and author’s calculations.
I’ll make three observations at this point.
- A big chunk of the increase in the debt-to-GDP ratio occurs because of the recession-driven collapse in revenues and the policy actions undertaken by the previous administration and Congress. Graphically, this is shown by the sharp jump in the series in FY 2009 (which started in October 2008).
- The debt-to-GDP projections do not take into account the stimulative effects of the stimulus plan, and in the budget. This is appropriate (as I have argued in the past, in my discussion of dynamic scoring [1]) because the magnitude of the stimulative effect is a subject of debate. Still, for those who are neither RBCers, nor Classical economists, we would expect the actual path of the debt-to-GDP ratio to be lower than projected (ceteris paribus) as GDP is higher than baseline in the first few years of the outlook [2] [3].
- The baseline debt-to-GDP ratio is in some sense unrealistic because it assumes discretionary spending grows with the CPI. Assuming that discretionary spending grows with nominal GDP — a more realistic assumption [4] — would make the gap between the baseline and the Obama budget debt/gdp ratio as scored by CBO smaller.
Still, even taking into account these factors, one should worry about crowding out, and the possibility that dollar denominated assets will become less desirable as the supply of Federal debt increases.
At this juncture, it might be useful to take a longer, historical, perspective on this issue. Below I plot data going back to FY 1938
Figure 2: Ratio of Federal debt held by public to GDP (blue), Ratio of end-FY Federal debt held by public to Calender Year GDP (real), CBO baseline (green), Obama budget as scored by CBO (black), and CBO baseline minus stimulus package (red), by fiscal years. In the baseline minus stimulus, I have merely subtracted the cumulated stimulus bill deficits; hence, no accounting for associated interest is included. Dashed line indicates last observation on actual data. Sources: CBO, CBO historical statistics, and CBO letter to Grassley (March 2, 2009), FRED II, and author’s calculations.
So, in the past, the Federal debt-to-GDP ratio has been higher than it is projected to be. Admittedly, the times are different. Financial autarky (approximately) prevailed in the 1940’s and early 1950’s, so the degree of substitubility between dollar and pound (and franc) denominated assets was low. That is not so now. However, it’s also important to realize that debt-to-GDP ratios are rising in many other economies that are associated with currencies that might be thought to be close substitutes (think UK). And in the euro area, doubts about the government debt of certain economies is likely to make euro denominated assets also poor substitutes. (Remember that many of the debt-to-GDP ratios in Europe are higher than that in the US — see slightly different [gross] ratios here). In any case, the analysis of the dilemma we are currently facing I laid out in this post from last July.
A last observation. Just think if the 2001 and 2003 tax cuts had never occurred. What would the debt-to-GDP ratio look like? I suspect we’d have a lot more latitude for stimulus. Not a new observation — see here (and the accompanying commentary, which in retrospect is quite amusing) — but one useful to recall.
[Update 26 March, 7pm Pacific]
Readers PM and Garett Jones accuse me of flip-flopping on the dangers of debt. I was indeed critical of tax cuts and expanding debt-to-GDP ratios under the Bush Administrations. And while I see dangers in the debt-to-GDP trajectory in the current budget, I do not see the situations as equivalent. Bush erased massive surpluses and increased the debt held by the public by something on the order of $4.3 trillion (the debt change from end FY 2001 to projected FY 2009 minus stimulus bill) while the output gap averaged a (negative) point. Obama’s budget (in addition to the stimulus bill), according to the CBO, will increase the public held debt by $2.3 trillion (change in end FY 2009 minus stimulus bill to end FY 2013), during the deepest recession the US has faced since the Great Depression (I hope nobody is going to try to convince me that it isn’t). This seems to me a substantive difference.
That being said, I do think we need to be wary of rapid debt accumulation. One way to lower the trajectory of the debt-to-GDP ratio is to allow the Bush tax cuts to lapse. Economist Mom made this trenchant observation:
So the biggest single proposal in the Obama budget contributing to the deterioration in the 10-year budget outlook is, contrary to public perception, not big spending on bailouts or stimulus or even longer-term health care reform, and not temporary tax cuts that are designed to provide immediate stimulus to the economy at only near-term cost, but rather permanent extension of most of the Bush (2001 and 2003) tax cuts–with costs that grow dramatically over time.
I think this is an option that should be seriously investigated.
I suspect readers PM and Garett Jones will not find this proposal to their liking, even though it is consistent with my views — consistently held throughout — that running structural budget deficits is a bad idea.
[Update March 28, 5:50am Pacific]
Reader RW asks for verification that the Bush tax cuts erased the surplus of 2000. Well, here is a picture from the CBO that shows the impact of just the first tax cut:
Source: CBO, Budget and Economic Outlook, Jan. 2002.
Technorati Tags: debt-to-GDP ratio, debt,
deficits, Obama budget, and stimulus package.
Given that U.S. Treasury has become the safe haven of investors around the world, which is a more appropriate measure: Debt to U.S. GDP or Debt to Global GDP. The U.S could finance it’s debt with just domestic investors but we haven’t for a long time and probably won’t ever.
Re “Just think if the 2001 and 2003 tax cuts had never occurred”. Perhaps a future comment might go along the lines of this: “Just think if the explosive growth in discretionary government spending in 2009 – 2012 had never occurred. What would the debt-to-GDP ratio look like? I suspect we’d have a lot more latitude for stimulus”.
Rajesh wrote:
“Given that U.S. Treasury has become the safe haven of investors around the world, which is a more appropriate measure: Debt to U.S. GDP or Debt to Global GDP. The U.S could finance it’s debt with just domestic investors but we haven’t for a long time and probably won’t ever.”
Be warned: China aparently wants the Bankor, the Keynes’s international money. BRIC aparently can buy that strategy. I just saw some moves here at Brazil from the Ministrio da Fazenda at that direction and I am looking for any action from BACEN, like make the IMF “money” our international reserve. If similar moves happens at India and Russia, we know it is coming.
You were warned, be carefull with what BRIC will make.
GWG: We were — particularly in 2003 — close to full employment. I think reasonable people will agree that we currently are not near full employment. That, I think, is a critical difference, from a macrostabilization perspective.
Menzie: We were — particularly in 2003 — close to full employment.
I agree with you, but at the time, I don’t think people thought we were near full employment. Remember all the talk of the jobless recovery?
For all of 2003 the average was 6%, while in 2000 it was 4%. I seem to recall a lot of talk during that time about the “jobless recovery”, and not much discussion that the economy was near full-employment.
But my main point is that whatever actions are taken at the time, be it tax cuts or increased government spending, you are in effect limiting your options to deal with the next crisis to come. Politicians of all stripes are notorious for kicking the can down the road. I see no difference today.
Menzie wrote:
…for those who are neither RBCers, nor Classical economists, we would expect the actual path of the debt-to-GDP ratio to be lower than projected (ceteris paribus) as GDP is higher than baseline in the first few years of the outlook…
Menzie,
Thanks for this. It is more important to define when a theory is a failure than when it is a success because those who hole to the theory can always say success will come later while failure is what it is when it is.
If the debt-to-GDP ratio is not lower than projected will see that as a failure of the theory?
Sorry, once again Anonymous is me.
Menzie when you say, “Just think if the 2001 and 2003 tax cuts had never occurred” you assume that without them the recovery would have been the same nor the recession was shortened. Did they not have a positive effect?
For me, this kind of thinking is getting us deeper into this mess.
How about this thought: Current policy shifts us from one bubble to an even worse bubble based upon politics resulting in unsustainable Government spending.
If I accept your previous thought, then if we had done nothing we would be coming out of this recession earlier and faster. Then the additional spending is totally unnecessary and wasteful.
Minzie wrote:
GWG: We were — particularly in 2003 — close to full employment.
Fascinating!! If this is true, as the BLS data shows 2003 was the highest unemployment year during the 8 years of the two Bush administrations. This means that we were near full employment during the entire time Bush was in office. WOW! Who would have “thunk” it?
2000 4.0
2001 4.7
2002 5.8
2003 6.0
2004 5.5
2005 5.1
2006 4.6
2007 4.6
2008 5.8
DickF: Those who have read at least an intro macro textbook know that unemployment rates are a lagging indicator. In any event, take a look at the output gaps plotted in this post. The CBO defined output gap is the largest in absolute value in 2003; it averages 1.8 ppts of GDP in log terms (dwarfed by the 4.4 ppts recorded in 08Q4, and likely to expand given the forecasted 6-8% SAAR decline in GDP in the current quarter), and by 03q2 was shrinking (although this might not have been apparent at the time). I will say that a tax cut on top of the anticipated defense spending spike (remember what else happened in 03q2) seems to me irresponsible. Perhaps the Bush Administration really did think the war would only cost $50 billion, in which case I’m willing to give them a pass… (on the macro stabilization aspect, although not on costing the Iraq operation — there they seem to be off by at least a factor of 10).
DickF,
I think what that shows is how unsustainable the bubble was in 1997-2000 when the unemployment rate averaged 4.4%. NAIRU was long thought to be 6%. The “new economy” caused us to expect lower unemployment, but as Menzie suggests, in 2003 we were probably at the long term natural rate of 6%.
Where does this full employment % come from?
Does the world really need more Americans to become real estate agents or financial engineers? Are Americans competitive with foreigners in other areas of production? Is our capital structure intact enough after the last spending spree to get back to previous levels of “production”.
Stop and think for a second if the world really needs more American workers/consumers, or if reality is saying that the American worker is costly and obsolete.
Foreigners made a big mistake gearing their productive capacity towards meeting the demands of American consumers rather then their own. They’ll adjust over time. If Americans can’t find something they produce for the world better then everyone else American workers will become obsolete. What’s full employment in a world that wants nothing Americans make?
Where does this full employment % come from?
Does the world really need more Americans to become real estate agents or financial engineers? Are Americans competitive with foreigners in other areas of production? Is our capital structure intact enough after the last spending spree to get back to previous levels of “production”.
Stop and think for a second if the world really needs more American workers/consumers, or if reality is saying that the American worker is costly and obsolete.
Foreigners made a big mistake gearing their productive capacity towards meeting the demands of American consumers rather then their own. They’ll adjust over time. If Americans can’t find something they produce for the world better then everyone else American workers will become obsolete. What’s full employment in a world that wants nothing Americans make?
I find the idea of a country with zero savings and a massive trade deficit being below full employment/production laughable. We were way above what was sustainable and that could not continue. In moving from jobs selling things to each other to jobs producing things for our creditors the question will come up whether we can produce anything our creditors want. If the answer is no, or at least no at the rate of wages/benefits Americans are accustomed too, people won’t find new jobs until we answer that question.
Dave,
It must really be a conundrum for you that the US has the highest GDP per capita of any large country.
Why do you use debt-to-GDP ratio based on Federal debt held by public? Only small amount of marketable securities are held directly by government accounts. Main debt holdings labelled as “Intragovernmental Holdings” are (in size order): Federal Old-Age and Survivors Insurance Trust Fund, Federal Empoyees Retirement Fund, Federal Hospital Insurance Trust Fund, Federal Disability Insurance Trust Fund, and so on. In fact, this state funds bear even higher liabilities to public then their whole assets. So, it is nonsensical to exclude their debt holdings from public debt. Especially it makes highly misleading your comparison of historic debt-to-GDP ratios because ratio of so called “Intragovernmental Holdings” has shifted substentionaly in time.
Why is it a conundrum? The US has had the strongest capital base in the world since WWII ended. And it hasn’t gone through a period where the national savings rate is negative until recentely.
The conundrum is how we can be expected to maintain the same level of GDP as during the bubble years even though the only way we managed to reach that level is by consuming and misallocating the capital needed for future production. If you damage your capital base, its no surprise that you can’t produce at the same level you use to. That doesn’t mean GDP drops 50%, but it does mean that stating that a drop represents a lack full production isn’t necessarily true. A drop merely reflects the fact that we can’t produce what we used to because our capital base can’t support it until we repair it. That means a lower overall aggregate and a higher % of I versus C in order to rebuild.
Similairly, if your base of human capital has been misallocated they aren’t going to find employment right away, and certainly not at the wage earned in a now defunct industry. Financial engineers are not actual engineers, and now that we don’t need financial engineers we find that thier training, our nations human capital, isn’t worth as much as we thought. It will take time and resources to retrain those people, assuming there are even jobs to which they would be suited that can’t be filled by someone else.
I think you need to respect the fact the national debt, corporate debt and personal debt are all claims on the same thing: the future work of a taxpaying US citizen.
Given that, you need to look at the total debt load imposed by all three, because the ratio of that total debt to the reasonable capacity for future work is what makes credit, in the aggregate, believable or not. If we are now adding national debt more slowly than we are shedding personal debt, we are in an improving situation. If the opposite, we are heading for really big trouble – bigger than we are now in.
I was just looking at a 100 year DJIA chart. From 1942-1966 the DOW increased 10X (from 100-1000). The DOW bounced around the 1000 mark until the mid 1980s when it began another 10X (1000-10,000) increase. The last 10 years it has been bounced around 10,000. Does anyone have an explanation why the stock market performs better when the public debt to gdp ratio is above .4?
If the 2001 and 2003 tax cuts had never occurred, then GDP likely would have suffered as a result. If Congress (both sides of the aisle) had reduced spending after 2001, then I suspect we’d have a lot more latitude for stimulus now.
I recognize the need for more government oversight of the financial sector. But, the government is an extremely inefficient steward of our funds, either compared to the private sector or on stand-alone.
debt to gdp is a meaningless statistic used to generalize and justify actions by the authorities.
it’s useful for an economist’s argument. it has no validity in the realm of finance.
if you want to talk about debt burdens, then look at a fully loaded consumer debt figure (their portion of the debt + all other consumer debt per capita) against per capita income levels. that would be a more useful measure of debt serving capacity by a populous.
the chart presented here is bunk.
Great to see how Menzie’s Bush-era rage and mockery converts so quickly to the Obama-era call for nuance and perspective.
I guess Menzie’s a fan of regime-switching models.
Garett Jones: I note that I use “perspective” in the title of seven posts starting from Fall 2005 until the end of the Bush Administration. The number rises if I include “subtitles”. I always think perspective is useful. But seriously, don’t you think there’s a difference between cutting taxes by trillions when close to full employment, as opposed running budget deficits as the output gap zooms to 8%?
‘I think you need to respect the fact the national debt, corporate debt and personal debt are all claims on the same thing: the future work of a taxpaying US citizen.’
And what is worse, 50% of voters in the last election pay no taxes.
Hence, partisans who disagree now will probably never change their minds.
The pandering class may have won the war, only time will tell.
Man, I don’t know what America is going to do. It obviously doesn’t “make” anything anyone wants, and it has clearly demonstrated no capacity to adjust, much less re-invent.
” I note that I use “perspective” in the title of seven posts starting from Fall 2005 until the end of the Bush Administration.”
And your “perspective” was almost invariably (I may have missed one) to flip to the negative. (Recall your “Perspective on the Surge and US Losses” where you, again, admonished against listening to the administration?) Whereas here, on a topic that under Bush you expressed grave concern over, you have suddenly decided things aren’t _so_ bad, and, besides, it’s all the fault of the previous administration’s policies anyway. You go to great lengths to truly put things here into perspective – competition, growth, problems with projections. These are nods you never gave the previous administration, and it’s that sort of thing to which people react.
PM: Thank you for your opinion. If you find my “perspective” so distorted, I do note that you have the freedom to read — and post — elsewhere. Clearly, from your perspective, there is no value-added to your reading my posts.
I’ll just ask — if there’s little good to be found in a policy, should I make something up to please you?
“If you find my “perspective” so distorted, I do note that you have the freedom to read — and post — elsewhere. Clearly, from your perspective, there is no value-added to your reading my posts.”
I find value in your posts. I do not find value in your inability to contain your ideology at times, and I am simply explaining why people who disagree (ideologically) with you would take issue in this case. You spent the last many years placing as bad a face as possible on issues (including debt-to-GDP ratios), whereas now – while not being a sunshine-pumper by any means – you apply the same effort (in a post such as this one) to polish things a bit.
“I’ll just ask — if there’s little good to be found in a policy, should I make something up to please you?”
I’d simply prefer you be a little more intellectually honest than ideologically motivated, which would make quality posts like this (save for hint of “But Bush!”) less likely to do a double-take from from the appearance of a double standard.
PM: Let me re-iterate. It is one thing to run up $4.3 trillion of debt-held-by-public eliminating a surplus when close to full employment (end FY01-projected end FY09 minus stimulus bill). It is another thing to run up $2.3 trillion end FY2009 minus to end FY2013, during the deepest recession since the Great Depression (calculation is from projected end FY2009 minus stimulus bill to end FY 2013 projected debt). If you can’t see that difference, then I’ll let readers decide where the ideological blinders are.
So, in the past, the Federal debt-to-GDP ratio has been higher than it is projected to be. Admittedly, the times are different. Financial autarky (approximately) prevailed in the 1940’s…
C’mon, the real difference is that back then everyone knew the WWII debt run-up was a short-term, temporary, one-time thing that would be soon run-down for years to come (and was).
Now projections like Auerbach & Gale have deficits running a trillion a year forever — well, for ten years, until the much bigger Medicare/Social Security deficits start coming in.
GWG: We were — particularly in 2003 — close to full employment.
Fascinating!! If this is true, as the BLS data shows 2003 was the highest unemployment year…
No, no, impossible, can’t be true. Don’t we remember how back then so many people were telling us the “Bush” recession was “the worst labor market since the Great Depression”? (For instance, among 250,000 Google hits for 2003.)
Now it was practically full employment. Go figure. It’s like politics makes economics subjective, or something.
don’t you think there’s a difference between cutting taxes by trillions when close to full employment, as opposed running budget deficits as the output gap zooms to 8%?
I also see a difference between Bush running deficts at 2% of GDP when unemployment was 5%, and Obama optimistically projecting deficits of over 3% when unemployment gets down to the same rate, with A&G (who aren’t right-wing “tea party” guys) projecting deficits of 4%-5%.
Jim Glass: OK, I give. The times we are facing now are not particularly dire. The Bush Administrations left the economy in great shape; the fundamentals are strong. No need for stimulus.
I respect Menzie’s suggestion that the Bush tax cuts be allowed to expire. It wouldn’t be my preference if I were in charge, but it is logically consistant.
Now, why exactly doesn’t Obama see that logic?
We all know a train wreck is coming, recession or not, Republican prez or Democrat. The baby boomers are retiring, and they’re going to bankrupt us all.
OK, I give. The times we are facing now are not particularly dire. The Bush Administrations left the economy in great shape; the fundamentals are strong. No need for stimulus.
A very false representation of another’s (assumed) views with a nice exercise of the fallacy of the excluded middle to boot.
I’ve never defended Bush’s fiscal policy in my life. To impung me as being a Bush defender is fighting words.
If you did it in person I’d throw a glove at you.
But I don’t follow the logic that if damn Bush fiscal policy producing 2% at 5% as bad, then we must praise planning to produce 4%-5% at 5% after the recession is over and full employment returns as better, good.
And the fact one notes that Obama projects 4-5% deficits at full employment does not mean one believes — “Bush left an economy in great shape, the fundamentals are strong”. Stop it, I’m trying to be accurate here.
Reagarding which, btw…
… during the deepest recession the US has faced since the Great Depression (I hope nobody is going to try to convince me that it isn’t) …
Only time will tell, I don’t have a crystal ball so I won’t. And nobody convinces anybody else of anything on blogs or usenet anyway.
But CBO’s “Gregg” letter of last month projected — with no stimulus — unemployment topping at 9% and an output gap max at 7.4%, compared to 1982’s unemployment of 10.8% and gap of 8.9%.
So CBO projected, sans stimulus, a recession that would be “the worst since 1982”. But still significantly less bad than 1982.
And as a matter of accurate perspective, if that’s so valuable, even a recession worse than 1982 would be **nowhere near** as bad as the Great Depression — so just how does it promote accurate perspective to keep invoking the words “Great Depression … Great Depression”??? Isn’t that just rhetoric?
Wouldn’t the perspective communicated actually be much more accurate when saying: “… the worst since 1982, and might even be worse than that!”
Hey, 1982 was plenty damn bad enough, I lived through it.
The fallacy of the excluded middle says: “If you don’t agree with me that this is already absolutely the worst economy since the Great Depression than you are a Bush apologist who thinks Bush left us a fine economy!”
But tell that to CBO, not to me again.
I’m in the middle that believes: the economy is bad, but not comparable even in rhetorical excess to the Depression, not quite as bad as 1982 probably though we’ll see about that … Bush’s fiscal policy was bad but not quite the work of Satan … a fiscal policy that projects 4%-5% deficits at full employment is worse than one that projects 2% — the bottom line is the bottom line … and as per Auerbach and Gale, most of that increase to 4%-5% is due spending increases that are unfinanced (which are every bit as fiscally bad and irresponsible as tax cuts that are unfinanced, at least).
If that middle so offends you, call me names again. If you don’t want commenters like me, just say so and I’ll happily never comment here again.
Jim Glass: An inspection of my post does not reveal any instance of me calling you anything in particular. I apologize for touching a nerve. I further apologize for not phrasing things as you desire.
I don’t think I said anything about the debt-to-GDP ratio in the out years of the forecast horizon (which is longer than anything the Bush Administration ever did) being “good”. So who is mis-representing? Indeed, if you read the post, you will see these words: “Still, even taking into account these factors, one should worry about crowding out, and the possibility that dollar denominated assets will become less desirable as the supply of Federal debt increases.” Again, who is misrepresenting?
I believe the forecast embodied in the “Gregg letter” has been superseded by the March CBO assessment I cited in this post a few days ago. Looks to me like this recession even with the stimulus is going to be as deep and more persistent than the 1982 recession. In other words, your point has been rendered inoperative by the CBO, given that you were relying upon an earlier CBO assessment. Personally, given the synchronized aspect of the recession in key economies around the world, I suspect the recession will be deeper than projected by the CBO.
By the way, I too lived through the 1982 recession as well. Not that it matters.
Menzie wrote:
DickF: Those who have read at least an intro macro textbook know that unemployment rates are a lagging indicator.
Menzie,
I have no problem with unemployment being a lagging indicator and I am certainly no apologist for GW Bush, I believe he will go down in history right beside Herbert Hoover because of his handling of the economy in his last two year. The fact is that even with 9-11, 5 major hurricanes in Florida (three in Orlando alone), a disasterous hurricane in New Orleans, a worldwide war on terror, and many other problems unemployment declined from 2003 figures into 2004-5. You can play econometric games but facts are hard task masters.
The times we are facing now are not particularly dire. The Bush Administrations left the economy in great shape; the fundamentals are strong. No need for stimulus.
I must agree with prophets. The debt to GDP ratio is unimportant. What matters more is the interest to GDP growth ratio.
Of course, we really need to find a better measure than GDP. Government spending and financials muddy the waters.
And what is worse, 50% of voters in the last election pay no taxes.
Liar.
Times-Interest-Taxed
aaron:
what really gets me upset is after these pro-liberal/keynesian spend-a-holics throw up the meaningless debt/gdp ratio (ignoring all the other debt on consumers backs), they then justify the stimulus and investments going into this country through an inflationary printing press of dollars.
it’s basically playing sleight-of-hand with the facts (the real amount of debt out there per capita) and then killing people’s standard of living by printing up a bunch of bills.
i can’t stand GWB, but I can’t understand how other intelligent people can drink the Larry Summers/Barack Obama koolaid. it’s such good “keynesian economic policy,” but such bad financial policy. the only way they get to the justification for half these activities is by trashing the purchasing power of the dollar. it’s a shame.
In your addendum to the article you write: “Bush erased massive surpluses”. What massive surplus? You chart shows that, measured in terms of percent of GDP the debt went down a bit. Of course we now know that there were big tax increases paid on the false income that the multiple bubbles created.
Still we never got near eliminating the debt en toto – now that would be what most of us think of as a surplus.
And of course like the statistics everyone ueses to their advantage (Clinton, Bush and now Obama) the long term liability of Socail Security, Medicare, Medicaid and other programs are not included in the budget.)
Clinton was clearly a much better financial manager than Bush2, and from what we’ve seen so far Obama. He did not however fix the fundamental structural problems in our government expenditures, nor create a “massive surplus” by any honest accounting.
Let’s put Carville-era propaganda to bed once and for all.
OMG! What a total cop out on the flip flop. Bush “erased a massive surplus”????
Why don’t you show exactly how that surplus was created? Try charting tax rates as % GDP and the answer is obvious. By 2000 we had an effective tax rate of 21% of GDP, the highest since 1945. The surpluses were enabled by the era of irrational exuberance. That means the surpluses were created on the back of the very financial situation we’re now having to deal with.
The surpluses vanished because the 1990s BUBBLE burst and tax rates dropped dropped precipitously. Bush dropped them further by cutting taxes to combat the recession, but it didn’t even cause any REAL debt problems, as your charts show.
It wasn’t “fiscal irresponsibility”, and it’s a real embarrassment to have economists like you pander to the politics instead of analyzing things objectively. People actually believe that Bush’s fiscal irresponsibility is what has caused this problem, thanks to you and your fellow “intelligensia”. All it does it make things worse.
Menzie, don’t you think that in your figures you should include state and local debt, and GSE’s such as Fannie and Freddie (now almost GOE)? Plus, of course, the unfunded liabilities of entitlement programs such as Medicare and Medicaid (for the tripling of which we have to “thank” the Bush administration). According to data supplied by Rob Arnott in an article on Financial Times of the 23rd of November (http://us.ft.com/ftgateway/superpage.ft?news_id=fto112320081806223856 ), when those components are factored in the total government debt can be estimated around 400% of the GDP, up from about 120% immediately after WWII.
Menzie,
I would like to know which fiscal year projection put forth by the Obama Administratrion in its first budget proposal satisfies any of your former or current goals of managing deficits in a satisfactory manner.
Aside from the CBO analysis, it was evident in reviewing the Administration’s budget proposal that deficit control was not a principal issue of concern through 2019.
I can’t justify what the Administration is proposing for the outyears. How can you justify the projected deficits beyond 2012 or 2014?
I would like to see what GMP Gross Manufactured Product looks like for quarter periods for the past 3 years. A country’s wealth increases from manufactured costs incurred v. sales value thereafter at FOB. The making of a saleable item increases GMP. A barber service to a customer walking out the door would not have a saleable item.
At this time, when we are looking at where efforts for job growth can be most fruitful, we need to look at stimulating manufacturing.
RW: In re: “What massive surplus?” With respect, what planet have you been on? See Figure 1 in this post, you can see the surplus, which would have remained even with the recession, in the absence of the first Bush tax cut. If you want to see the impact of the on projected budget balance, see Figure 1-3, CBO, Budget and Economic Outlook, January 2002. Note that this does not incorporate the impact from the subsequent JGTRRA.
Manzie, every time you play the what if game: “you can see the surplus, which would have remained even with the recession, in the absence of the first Bush tax cut.” you continue with the assumption that nothing should have been done in 2001-3, and then panacea (in the form of reduced deficits or surpluses) would have been achieved.
No! If we had done what Dems (and you?) wanted extra spending especially on infrastructure, that extra spending would also have been borrowed. Revenues were down. My perception is that the recession would have been longer and perhaps deeper. Result: more and greater deficits, and untold economic pain for many more millions of Americans.
My evidence? This administration’s budget projections. Deficits as far as the eye can see and growing when they should be diminishing. All this while taxes are being raised astronomically.
Menzie, sorry bout that typo in your name!
CoRev: You’ve just forwarded yet again the unsubstantiated (empirically) thesis of “starve the beast”. I refer you to Jeff Frankel’s post on this subject.
Menzie, I responded to your assumption about the GW tax cuts. I do not believe Laffer got it right, I do believe that GW and the Repub Congress were a LOT more responsible in their spending than the current admin. If you think otherwise, then your BDS is blinding you. Eventually, y’all will have to stop blaming Bush. I don’t know if this graphic will show, but this is what I am responding to.
http://wapoobamabudget1.jpg
Menzie, try this link: http://www.powerlineblog.com/archives/media/wapoobamabudget1.jpg.jpeg
CoRev: Really, to distinguish between your view and mine, we need the structural (cyclically adjusted) budget balance.
What the heck is a BDS? (Aside from a statistic for testing for deterministic chaos?)
BDS = Bush Derangement Syndrome. Your bias show through your articles and threads. That’s why you are called on it.
BTW, why do we need another set of numbers? Why not just use the monthly/annual/historical Treasury deficit numbers?
CoRev: What you call derangement, others would call an objective assessment. In re your question — Er, because we want to control for the state of the economy…
Well, this is an interesting thread, full of docile commentary.
I’m not sure I understand the intensity of all the Bush2 vs Clinton vs Obama bickering. It seems a longer term perspective might be warranted. Spending to GDP has been remarkably stable since the mid 60’s. However, the dirty little secret is that defense spending has declined from the teen’s to 3-4%……while social spending has turned into a juggernaut, keeping the total spend to GDP ratio fairly constant. It has been a 45 year process, but its now coming like freight train.
This has transpired under a number of R vs D Administrations and Congresses. A pox on both their houses. There are no heroes here.
But the fact is we are rapidly approaching the point where long term ratios of taxing and spending to GDP will go into uncharted waters.
With no evidence I have seen that would suggest we were headed to Great Depression II or The Japanese Experience, one would think Obama would have wanted to save some powder………..unless, of course, he knows exactly what he is doing.
Can we see more posts from Prof. Hamilton. I don’t want ideologies clouding analysis.
I hope Menzie realizes that whenever he invokes a politician to buttress his argument, he loses credibility. Most of us realize that there were good things and bad things done in the Bush administration and similarly good things and bad things will be done by Obama. So can we stop playing the blame game and analyze issues the way they should be – objectively.
Raj: I am confused; what politicians have I invoked to support my arguments? Please name a name or names.
If it’s the identification of the Bush tax cuts that troubles you, I am happy to identify the culprits as EGTRRA and JGTRRA.
Menzie,
I would like to know which fiscal year projection put forth by the Obama Administratrion in its first budget proposal satisfies any of your former or current goals of managing deficits in a satisfactory manner.
Aside from the CBO analysis, it was evident in reviewing the Administration’s budget proposal that deficit control was not a principal issue of concern through 2019.
I can’t justify what the Administration is proposing for the outyears. How can you justify the projected deficits beyond 2012 or 2014?
Dear Menzie,
Thanks for keeping such an open forum for discussion here. You’re providing a service to the profession both with your informative posts and through the discussion you foster.
I don’t have big qualms about letting most of the Bush tax cuts expire per se–it’d be a reasonable part of a Clinton/Gingrich style budget summit.
I see the Bush tax cuts as part of a stochastic equilibrium of a game played between Left and Right: The Left usually raises taxes when in power in part *because* the Right usually cuts taxes when in power. And vice versa. All part of an economically inefficient but politically stable equilibrium (I actually said this in conversation with economist Debin Ma in the early 2000’s–it’s just not a post-hoc rationalization).
One of the major benefits of such an expiration: It would restore some “regressivity” back into the tax code. I think the political economy dimensions of having the income tax paid largely by the rich are underexplored–at least I don’t know the literature, if it exists. The Bush tax cuts, with their per-child tax credits and the 10% bracket, pushed the (smaller) income tax burden higher up the income distribution. Seems problematic to me.
Has anyone taken into account that the last 4 years of GDP numbers were fake? A full 40% of GDP was in the financial markets, which we are just now figuring out we vastly over valued.
That tends to change a whole lot, don’t you think?